RBI manages to sell entire stock in bond auction

After four of its bond auctions remained incomplete, the Reserve Bank of India (RBI) managed to sell the entire stock of its Friday’s ~120 billion auction.

The RBI, on behalf of the government, sold five bonds, including one fixed-rate bond maturing in 2031, against which it raised ~40 billion.

Economic Affairs Secretary Subhash Garg said in a televised press conference in New Delhi the government might have misjudged the market demand for certain sets of maturities, and it might change the composition of bonds used to borrow ~2.88 trillion, which is the first half programme. However, the government is in no hurry to change the composition as of now and would wait for a few weeks, he said.

After having a discussion with market participants, the government had decided to introduce five-year and twoyear bonds. However, the market participants wanted higher yields (or lower value) for the five-year segment, which the RBI was not prepared to give. Primary dealers, or underwriters of the bonds, were forced to buy them. In Friday’s auction, the government raised ~10 billion from a two-year bond.

In his interaction with reporters, Garg said there was always a demand for bonds in a growing economy, but at a price. He did not agree that there was no demand from banks for the bonds on offer when the portfolio was incurring mark-to-market losses because of a steep rise in yields.

Garg did not seem worried about the outflow of foreign investors from the local markets. He expressed confidence that the investors would come back when they find it convenient for them.

The 10-year bond yield closed at 7.83 per cent, down from its previous close of 7.88 per cent. The trading hours were extended till 6.30 pm from 5 pm earlier to facilitate allotments of auction stocks, said a senior bond trader.

"On the face of it, it seems the rise in yields has stopped. There is a relief in the market," said the bond dealer.